Transcription:
Penny Crosman (00:03):
Welcome to the American Baker Podcast. I'm Penny Crosman. According to the Federal Reserve Bank of Minneapolis, white Americans hold 84% of total US wealth, but make up only 60% of the population while black Americans hold 4% of the wealth and make up 13% of the population. Why does a racial wealth gap persist in this country and what steps could be taken to finally close it? We're here today with Marisa Calderon, executive director of the NCRC Community Development Fund and nonprofit community development financial institution. She has devoted her career to issues of economic mobility and bridging America's racial wealth gap. Welcome, Marisa.
Marisa Calderon (00:47):
Thank you so much for having me.
Penny Crosman (00:48):
Thanks for coming. So how would you define the racial wealth gap in this country? Are there particular statistics or particular evidence that you point to sort of quantify this problem?
Marisa Calderon (01:06):
Yes. So from a narrative perspective, the racial wealth gap really refers to the disparity of assets and the difference in net worth amongst households of different races and for black Americans, what that means is that they hold nearly eight times less wealth than white Americans. For Hispanic Americans or Latino Americans, they have about five times less so a wealth of their white counterparts. And for both black and Hispanic households, that translates to real economic impact on a daily basis. And from a pure numbers perspective, white households have about $189,000 in total household dwell. And in contrast, black households are about 24,000 and in Hispanic households are just over 36,000. So from a real dollars and cents perspective, the difference is dramatic and has persisted for black Americans since their emancipation from slavery in 1863 and for Hispanic Americans has persisted. Also, though many Hispanics from a native perspective were here in the United States before white Americans. And so that's a gap that's persisted for the entirety of time that this has been a country.
Penny Crosman (02:41):
And I know this is a big complicated subject, but what do you think are some of the top reasons why these wealth gaps persist?
Marisa Calderon (02:51):
Well, I think that the sort of complicated and uncomfortable reality is that the system is working as intended and it just isn't intended for everyone to prosper. There have been some systematic efforts over time to make the system more useful, more accessible for white Americans than it has been for black or Hispanic Americans or others, non-white Americans. It's from codifying through to today with some of the challenges in terms of how individuals are credit qualified and how credit scoring is seen by many as a way of really codifying and in exacerbating systemic disenfranchisement. So it's complicated and layered and really requires a thoughtful, nuanced approach to unpeel all of the layers of what is otherwise a pretty stinky onion.
Penny Crosman (04:05):
So are you saying that you see persistent bias and sort of willful actions that are keep this racial wealth gap in place?
Marisa Calderon (04:18):
I mean, I think what I'm saying is that if it was a relationship status on social media, it would be, it's complicated because yes, there are certain individuals that might act in a way that is intentionally racist, but the majority of the issue is frankly much more complicated than that. That systems and structures were developed over time in a way to benefit a certain segment of the population. And so doing disenfranchise others and to address that really takes it. It's going to take some thoughtful collaboration from a lot of different stakeholders to unpack and to make some changes. And that comes in the way of not analyzing people to limit their access to credit if they're justice impacted, not presuming that being justice impacted, for example, makes you an inherent bad credit risk. And it comes in the way of understanding why there is systemic bias built into the appraisal process for appraising residential homes and how some of those challenges that exist can be addressed separate and apart from whether a human who's part of that is bringing their own bias to bear.
Penny Crosman (05:50):
So for the justice impacted, do you feel that somehow having sort of conviction record should be kind of erased from people's history somehow or
Marisa Calderon (06:05):
Yeah, I mean think that when it comes to qualifying for credit, most banks will automatically disqualify you from consideration for a small business loan if you are just as impacted, if you have experienced any sort of impact, whatever it may be, whether it is something that you and I might find objectionable versus something that might have been a minor infraction. And the reality is that there's, from a pure numbers perspective, there isn't anything that no data that I can certainly find that demonstrates a connection between an ability to repay a business loan. And whether you were convicted of a marijuana possession or a non-violent felony, those things are not correlated. They just like we as a society feel some way about that and we have decided to impose a correlation.
(07:09)
And what I'm suggesting is that those two things aren't connected. There's plenty of data that demonstrates that they aren't. And just for that one segment of the population, if they have indeed served their time and are no longer imprisoned, then we as a society have a collective interest in ensuring that they have a means to support themselves sustainably. Otherwise, recidivism is likely because they don't have a path to get a job. It's difficult for them to be entrepreneurs. And then how else does that segment of society support themselves and the people that are part of their household, they are left with no good choices, if you will. And that's just one small segment of a population that is often impacted financially and intends to more frequently be people that are communities of color, not because they're more likely to offend, but because they're more likely to be criminalized.
Penny Crosman (08:15):
Can you think of another example like that?
Marisa Calderon (08:19):
Well, when it comes to actually qualifying for credit, today's consumer is different than the consumers of the 1950s and 1960s. They utilize credit differently. Their understanding of systems and structures is informed by whatever their own experience and their proximity oftentimes to an immigrant experiences. Most of the population growth in this country is coming from communities of color, largely driven by Latinos. And though the population growth for Latinos in is coming from native born populations, again, there's a proximity to an immigrant experience that informs perspective. And because of that, and because that's distinctly different than what was largely a white America of the 1950s and sixties, the fact that they use credit differently and frankly in a way that disadvantages them, results oftentimes in lower credit scores, in higher utilization of credit when it is obtained or in thin credit files, all of which really creates a credit impairment and an inability to access credit where credit qualification is important and in the purchase of a home, it certainly is.
(09:42)
And so that in particular, it causes challenges. Latino populations, the black populations tend to be renters more so than homeowners, and aren't advantaged by having a positive reporting of rent on their credit, but they're disadvantaged when they don't pay rent or when there's an eviction that gets reported. And so that sort of disparity ends up causing long-term challenges and damage.
Penny Crosman (10:19):
Would you like to see more lenders consider rent data as in their process of approving people even if they don't have a strong credit history or credit score?
Marisa Calderon (10:31):
Yeah, I think that considering the payment history as a whole, including rent and other things that demonstrate that you are paying obligations in a timely fashion, that you're ready and prepared to become a homeowner and understand and have capacity for all of what that homeownership experience includes, which sometimes means a water heater's going to break and you have to have enough in reserves to be able to pay for that, those sorts of things would be important.
(11:04)
I think that being able to have access to support in the way of down payment assistance can be especially helpful to communities of color, especially that are first time home buyers because they tend to be more asset deficient than their white counterparts. In today's rate environment, having access to rate buy down could be helpful to make a pathway into home ownership. For more folks who are paying rent, they live somewhere, they're paying rent, sometimes that rent is more than a mortgage would be. And certainly identifying a way to create opportunity where that can be leveraged in a way that builds assets for a family for is definitely something that needs to be explored.
Penny Crosman (11:57):
But you would probably say only for an approval, not for a decline to use the rent data, like you were saying before, that could negative or and does negatively impact a lot of people. Well, I've read that your organization uses AI to increase lending capacity. How do you do that?
Marisa Calderon (12:17):
So in our small business lending, we've implemented automation and really data collection and evaluation to utilize essentially inclusive underwriting guidelines that do some of what I described earlier that don't consider whether you've been justice impacted as it qualifying component of the evaluation of your credit worthiness. It's something that we do track once a decision to fund has been made so that we can have a better understanding of whether we've made credit more accessible to someone who otherwise would not have had that access. We also utilize technology in a way that helps us to ingest data to understand a whole financial picture. If you as a small business, for example, have tax related information that is not truly illustrative of what your full financial picture is, then we look at data to do cash flow financing, which is oftentimes a much better picture, especially for nascent small businesses of what your actual ability to repay a debt would be.
(13:38)
And we pair that with technical assistance to help the small business understand how to accomplish their goals. So we want to understand what their goals are and we help them to understand how to navigate the systems and structures that exist that they may not be as familiar with so that they can accomplish whatever their business goal is. If they want to scale to be very large, then we want to help them with that. If what they want to do is stay small and nimble and essentially just meet their own personal financial obligations, then we want to help them with that as well.
Penny Crosman (14:13):
And have you found that the default rates are pretty low, even with the sort of alternative data?
Marisa Calderon (14:20):
We have a default rate of less than a quarter percent. So I think that the proof is in the pudding, as my mother would've said.
(14:31)
Our borrowers though they might be considered more risky from a mainstream banking perspective, don't perform that way. And I would say that's especially true of the startups that we fund. And startups have a notoriously tough time of any startup has a tough time getting capital from mainstream banking, largely because small businesses that are in that kind of early three year stage are much more likely to not be sustainable after the first couple of years. But the fact that we are very intentional about pairing our capital with support and resources, we feel like that is part of that winning mix of really helping the business accomplish to whatever it is that they want to accomplish.
Penny Crosman (15:20):
That makes sense. What kinds of resources do you mean sort of counseling and advice?
Marisa Calderon (15:26):
Yeah, so we have a couple of accelerator programs, one that is specifically intended for startup businesses.
(15:34)
So any business that's within its first three years of existence, and the other accelerator is intended for existing businesses that are looking to scale. And because we have them segmented in cohorts that are of other businesses that are in the same sort of growth phase that they are, but it's industry agnostic, they have an opportunity to really build rapport, to begin to build a network to build out their own social capital, which there's lots of data from organizations like Stanford's Latino Entrepreneurship Initiative that demonstrates that well, networked businesses tend to be more successful, more sustainable in the long run. And so our accelerators are set up as much in a cohort fashion for that social capital benefit as it is for the entrepreneur to be able to really dig in and learn best practices, not just from us, but from other businesses that do similar and sometimes different things than what they do.
Penny Crosman (16:39):
So when I think about the racial wealth gap, and I'm not an expert on it by any means, but one thing that comes to my mind is that minority neighborhoods are often places where people struggle. They often don't have a bank branch and they have check cashers and payday lenders and so forth. So it's hard. It can be hard for people to get access to normal credit and get advice from people, be able to walk into a building where someone could advise them. And there are a lot of people who worry about, as banks shrink their branch footprints as more and more people use mobile banking and online banking, this access to physical access to bank branches is going to come more and more of an issue. Do you have any opinions about that?
Marisa Calderon (17:37):
I do. I think that we should be very concerned for high resourced households. For high resourced communities. Bank closures are not as much of a concern because you have a car, if you need to really go to a bank in person, you could get there the chances of you being resource constrained to be able to figure out how to solve your banking need or less. And for the most part, a lot of folks who utilize online banking services are, they tend to come from more highly resourced communities, or at least use them with the fluency where they don't necessarily need a banker involved in everyday transactions where, whereas in communities that are lower resourced communities that have less of every kind of resource, be it groceries and markets and banks and other services, banks tend to be much more important their material to the fabric of the community. And when bank branches close, it has oftentimes just a decimating impact to the community.
(18:53)
You can look no further than PSA where there's a lot of historic impact from, certainly if we go only as far back as the Tulsa race massacre of 1921 today, much of that Northern Tulsa community still lacks any bank branches and no market or grocery stores. There's one shining example of a market, a grocery store there that's a community grocery store that serves as the sort of hub that a bank could be where people come into the grocery, not just to buy apples and chicken, but to solve real household crises. And the absence of these sorts of fixed and helpful resources in a community can have detrimental effects, not just for the near term, but for the long term health of that community.
Penny Crosman (19:53):
Yeah. Well, I don't know what the answer is because I know it's hard to see this trend reversing, but maybe there'll be some alternative or some new type of organization will come in to fill that gap.
Marisa Calderon (20:08):
Well, I mean, I guess I look at the kind of continuing changing demographics of the country, and that between now and in 2060, the country's population growth is going to come. Urban institute estimates that it'll come entirely from communities of color. Likewise, household net household growth will come from communities of color. And in both cases, both the population growth as well as home ownership, net home ownership growth, those would overwhelmingly be coming from the Latino community because birth rates are higher than they are for their non-Hispanic counterparts. And an ever-growing community has a more rapidly, a more rapidly forming household, and thus, those households eventually come become homeowners. So the reality is that this is an issue that needs to be resolved for the economic prosperity of the country, not just for the communities that it affects, because in this case, a rising tide will lift all boats.
(21:22)
So it's really an economic imperative for us as a society to ensure that we're investing in communities where the growth is happening. So the gap doesn't further broaden to a chasm, and frankly, I'm concerned that there isn't enough time and attention being placed on developing solutions by large financial institutions.
Penny Crosman (21:49):
All right. Wells said, that's a call to arms of a sorts, I guess. Well, Marisa Calderon, thank you so much for joining us today, and to all of you, thank you for listening to the American Banker Podcast and produce this episode with audio production by Kevin Parise. Special thanks this week to Marisa Calderon at the NCRC Community Development Fund. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crossman and thanks for listening.